Login to Spes Nova

Background

Last updated on 2013-10-31 13:28:28

The roots of the microfinance movement may be found in the early 1970s with the development of micro-lending. Since those early initiatives, microfinance has blossomed into a huge movement, representing:

- at least 50 developing countries,

- over 3,000 firms,

- over 150,000 organizations,

- over 650 million savings and loan accounts (representing

about one-third of the world’s poor), and

- about $4.5 trillion of total banking assets.

The majority of the microfinance activity today takes place through microfinance institutions (MFIs), organizations specifically dedicated to providing microfinance services to the working poor. These tend to be highly localized entities, operating within a single country, often regionally concentrated. They may be for-profit or not-for-profit organizations, and are generally regulated under specific microfinance laws in their respective countries.

MFIs typically are not banks, at least not in the sense of banks in developed countries. They often have modest asset bases and are not able to turn to central banks for funding or liquidity. Instead, MFIs rely on funding from donors, borrowed funds from commercial banks or other capital providers (increasingly, syndicated loans from the global capital markets) and internally generated capital.

The MFIs have developed the means for dealing with remarkably small transactions. Average savings account balances are $275 and average loan amounts are $450. The MFIs have managed to overcome traditional expense barriers through innovative uses of local representation (typically village women, operating out of their homes) and technology (such as satellite internet connections and cell phone technology). Despite the lack of availability of traditional collateral, MFIs making loans for commercial purposes generally experience extraordinarily low default rates, almost universally below 1%. This favorable experience has been generated through unique combinations of group lending and the use of social collateral (relying on family and village commitments to strengthen the obligation to repay loans).

Despite these favorable repayment records, MFIs charge interest rates of 25-40% or more. While these high rates generally provide the MFIs with a net profit, they tend not to be excessively profitable. What appear to be out-sized margins are eroded by the MFIs' own costs of funds (often 15-20%) and relatively high transaction expenses as a result of the tiny size of the average loan. (By example, assume screening, managing and processing costs are $50/loan. Measured against a $5,000, 3-year loan, this would amount to just .33%/year. Measured against a $500, 1-year loan, administrative costs alone would be 10%/year).

It is important to note that the working poor do not have access to traditional local banking systems. They do not have assets to use as collateral, they rarely have verifiable credit histories and their transactions are far too small to be processed efficiently by commercial banks. From a traditional banking perspective, these loans are far too expensive to administer and represent default risks that banks are not able or willing to manage. MFIs fill the gaps in serving these clients. While their history is relatively short, the impact MFIs have had in serving the bottom of the pyramid is enormous. Spes Nova and our supporters will help expand that impact.

Give a person food and they’ll feed their family today. Lend them the money to start a business and help them find markets for their products and they’ll employ their village, supporting and encouranging a sustainable global economic growth. That is our goal!!!!